HP buyers get Hands On Design

In addition to strategic sourcing and supplier management issues, Hewlett-Packard buyers are increasingly called upon to work with R&D and sales and marketing.

By Jim Carbone -- Purchasing, 7/19/2001 6:00:00 AM

Hewlett-Packard is taking strategic purchasing to a new level.

HP is expanding the role of purchasing. Buyers are not only choosing and managing suppliers through commodity councils, they are working with engineering even before new desktops, portable computers and servers are designed. They are influencing HP's new products by providing critical information about supply conditions and market trends and recommending suppliers before designers start working on new products.

"Purchasing is far more influential at HP than it used to be," says Corey Billington, vice president of supply chain services for HP. "For one thing we partner with the sales force and we partner upstream with the design teams. We have been working to reduce risk for HP and our suppliers," he says.

As purchasing's role at HP becomes more strategic, day-to-day component buying for HP systems is handled by contract manufacturers. HP is entrusting its CM partners with building and testing its systems as well as the distribution of those systems to HP's end customers. Many of the systems literally are not touched by anyone at a HP facility.

"This has been an exciting revolution in purchasing," says Jim Burns, worldwide manufacturing manager for HP's mobile computing division. Burns is also a member of HP's Procurement Board, which makes strategic decisions about HP's supply base. "The purchasing group is driving the business, not just supporting it. I cannot think of a function in the business that the purchasing team is not integrated with," he says.

For instance purchasing works with HP's research and development and marketing groups, says Jun Kim, materials manager for HP's mobile computing division which makes the Omnibook notebook computer among other products.

"We know the supply base and we have a good idea what the suppliers' roadmaps will be," says Kim. "We do robust quarterly updates on commodity market trends, prices trends, technology trends and we bring that into R & D and marketing way ahead of the product life cycle that allows them to design a product as efficiently as they can."

Kim says that product design teams and marketing teams regularly come to commodity managers to get feedback on what the "sweet spot" of a commodity will be. "Commodity managers have an eagle eye view of the market. It's their job to know what is going on with suppliers so we are aligned with the right ones. They know who is investing in capacity, who is committed to the industry and who is number one or two in a technology," says Kim.

For instance with disk drives, design teams may ask the commodity manager which hard drive will be in most demand, 10 gigabyte or 20? Which drives will be most readily available? What are the price trends? "The same types of questions are asked for LCDs and memories and other commodities," says Kim.

Burns adds that purchasing is involved with marketing strategy. He says purchasing may sit down with marketing and say "we think customers are willing to pay a hundred dollars for a liquid crystal display (LCD) that is one inch bigger. We may be able to get that LCD at a fraction of that price which drives value to the customer and margins to ourselves and our retail partners."

The sales connection

Kim says purchasing is increasingly involved with specific sales opportunities. Example: A school in the United Kingdom recently wanted to purchase Omnibook portables for all of its students. It budgeted a certain amount for the computers, but did not have enough for all students.

The sales team called in purchasing. Purchasers worked with component suppliers to discount the price of LCDs, disk drives and other components in the portable PCs. Many of the suppliers had excess inventory of parts and could reduce the cost. HP was able to supply the school with its laptops and keep within the school's budget.

That role in supporting sales is new to HP and is growing.

"Just several years ago our sales force could not name anyone in purchasing," says Burns. "Now they have purchasing on speed dial."

He says purchasing has helped win four major million dollar plus deals over the last nine months by "going to the supply base to get some help."

Some of the deals are very innovative. One deal with a bank involved a futures contract for memory chips. The bank wanted to buy 12,000 computers, but wanted price protection for the nine months that it would take for the machines to be deployed and for people to be trained to use them.

"They wanted a fixed price for the duration," says Claude Perrigault, purchasing manager for the business desktop division. "We analyzed the problem and the risk was the volatility of memory price. We started discussion with our memory suppliers and worked out a way to buy an option on memory chips," he says.

Greg Schmidt, manufacturing manager for network servers, says HP offered the bank two choices. "We gave them an option of giving them whatever the price of memory would be in nine months, or the current price which would be locked in for the duration of the deployment of the project. Being a bank they loved that kind of choice," says Schmidt. The bank took the futures memory option and HP won the contract.

While purchasers' role is expanding and they are working with sales and marketing and engineers, managing the supply base for HP is still job one. Suppliers are managed by HP commodity managers and councils.

Commodity councils are comprised of HP buyers around the world. Often a purchasing manager will head a commodity from a division that uses large volumes of a commodity. Case in point: LCDs. Kim heads up the LCD commodity team as his mobile computing division uses a lot of LCDs for the notebook computers. Pirragault takes the lead on disk drives because his division requires large volumes of drives for desktops.

While one division may lead the efforts of the commodity council the requirements of all divisions for a commodity are combined.

"What these councils have enabled us do is get the benefits of a centralized model," says Burns. "When we consolidate our purchasing power we can become the number one customer for a supplier. If we didn't have these councils we might all be number four or number five." Having clout with suppliers is good for HP's customers.

"When you're a number one customer you can demand certain types of treatment and HP's value proposition is one that is around assurance of supply where we don't make our customers wait for the products, says Burns.

In addition when supply gets short, "HP typically comes out better than our competitors because of their relationship that we had," according to Burns.

Kim says councils meet once a month or quarter depending on the commodity. Each division has a representative on the council and a lead division will house the function. "The council brings together all the knowledge of a commodity and creates a forum to give HP a complete view of the market out there," he says.

Based on the intelligence gathered by the commodity councils, HP sets its supplier strategy for commodities, chooses suppliers and determines which suppliers get how much business.

Managing risk

Part of the commodity strategy involves reducing and managing risk for HP. "We work with suppliers to figure out who in the supply chain can cost effectively manage the risk," says Billington. It could be the component supplier, contract manufacturer, HP, or even the customer such as the bank that opted for the futures contract with memory. "Customer may say I'll take the spot price for memory. I'll bear the risk as a buyer of PCs. Or HP will do it or the supplier will do it or CM will do it. We spend a lot of time trying to figure out how to eliminate uncertainty," he says.

In determining how to reduce risk in its spend, HP tries to take an analytical approach. Billington says 50% of HP's spend is through long-term contracts negotiated with suppliers. About 35% of the spend is variable, which involve non-binding agreements that provide a high degree of flexibility. 15% is spot buying which could be through online exchanges or independent distributors and can be an opportunistic buy. Each method of buying has a risk.

"Let's assume the spot market works and is perfect," says Billington. "You pay a small premium to buy spot. Say its 3%. Would you buy 1% of your sourcing through the spot market 5%, 50% or 95%? The answer to that is mathematical. You better think through it as a procurement organization. Is it a lot or a little and why? When would it become a lot if it is a little now?"

We ask our buyers "what is your risk position today? How much are you paying to assure supply? Procurement is being converted from a contracting function to a trading function," says Billington.

CMs are integral

While HP purchasers concentrate on strategic supply and risk management issues, the day-to-day buying of parts is the responsibility of HP's contract manufacturers.

Outsourcing has become an integral part of HP's business model as it has with many high-tech companies. Burns says HP's outsourcing efforts have helped HP reduce its inventory levels, improve quality and shorten product cycle time. "We have been able to reduce our inventory by 4x, we have improved our quality by 3x. The more you touch a product the more there is a chance that something will go wrong. We have shortened total cycle time to customer by 2X," says Burns.

He says HP has been able to remove entire steps out of its supply chain. "We no longer stock finished goods inventory. All of our inventory is held at the component level," says Burns. "We provide real-time information to our component supplier on what HP's demand is and we have an HP facility just a short ride from our CM's that house inventory."

Burns says the role of contract manufacturers have changed. HP use to use them for boards, but now uses them for box builds as well.

"Contract manufacturers build our products to order and ship to customers," says Burns. "We have linked our CMs with our order management system and we have global logistics capability to ship directly from their factory to the customer," says Burns. CMs basically see a customer order the same time HP sees it.

"This is something that has emerged over the last two years. This has helped reduce inventory and improve quality. CMs are our strategic partners," says Burns.

In recent years, HP has added contract manufacturers to its roster to support HP's growth. However, customers requirements change and HP needs CMs who can support those changes.

Choosing the right CM that best suits the needs of HP and its customer is no easy task because the capabilities of contract manufacturers can vary based on type of product, technology and volumes. "Each of them are better doing something and not as good at doing something else," says Perrigault. "Identifying which ones are the best for which type of responsibilities is the art of procurement."

While HP places a lot of trust in its CMs, there are times when HP purchasers need to get involved.

"CMs call us when there are parts shortages and then we have to take action," says Burns. "In some cases we have to find the parts in auctions. " In other cases HP buyers draw on their relationships with component suppliers.

"What we learned about outsourcing is we have to remain visible with the component supplier," says Kim. That's important because the component supplier needs to know that while the parts may be shipped to the CM, they are for HP products.

HP uses 10 contract manufacturers and five get the lion's share of the business. But all suppliers are subject to change over time.

"We will be providing more flexible offerings for our customers. Customers have diverse needs and we want the ability to meet customer needs and allow them to build and customize their own products over the Web," says Burns. "CMs will have to provide some of the customization whether it is software or hardware related.

Monitor this

As HP outsources more, it needs to closely monitor its supply chain.

HP recently began using an online tool called GetSupply to monitor the flow of goods in its supply chain. It has tested the system on low value parts such as logos and power cords, but soon will use it for memory chips and other commodities. It basically allows HP to track orders from suppliers to it facilities and to contract manufacturers. It gives HP an early warning if parts don't show up at a key supplier's dock. HP buyers then can take action to make sure the flow of parts continues.

Plastics are one commodity that will be monitored. "You have a resin manufacturer, a compound molder, a contract manufacturer or an HP facility," says Billington. "I've told the plastic commodity folks, if I find a case where we can't ship a product because resin didn't show for something, even though that is three tiers removed it is you fault. Make sure you can monitor the flow of goods."

Goods may not flow because the resin supplier was not paid by one of HP's suppliers. The monitoring system will identify the problem so HP buyers can take action to avoid a stoppage in the flow of goods.

HP will likely use more online tools in the future to reduce cost, buy more efficiently and reduce risk. However, in addition it will have to continue to find innovative ways to use strategic purchasing to make HP more competitive in the marketplace.

"HP is a diverse company," says Schmidt, the manufacturing manager of network servers. "How do you make a big diverse company act faster and be more proactive?" he asks. "How do you change your practices and processes that result in quicker, better, more relevant decisions while risk increases daily because of the speed and execution and market dynamics. That is the challenge for purchasing and HP in general."